Wednesday, August 10, 2011

Economy: A New Recession? Not Likely

The danger of a new recession in the U.S. is the talk of the town. But I think this so-called double-dip recession is highly unlikely. Here´s why:

1. The U.S. consumers are still in spending mood. Last week a lot of U.S. retailers, including department store J.C. Penney, discounter Target, luxury chain Saks, wholesale club operator Costco Wholes and fashion holding Limited Brands (Victoria´s Sectret) reported surprising strong sales for July (driveby.consumers ). Today Macy´s, the leading U.S. department store, and the fashion retailer Polo Ralph Lauren reported both more quarterly profit & revenues as expected and upped their guidance for fall ( reuters).

The consumers are still optimistic and are reacting to the healing job market. In July payrolls rose by 117,000 employes, the jobless rate dropped to 9.1%. Average hourly earnings climbed 0.4%. Yes, that is slow, but no sign of a recession either.

2. The profits of the companies are rising. I guess there are two main reasons for that: First: Companies are getting more efficient. Lower cost enable them to grow even in a sluggish economy. Second: Companies are benefitting from the rapid growth of emerging markets (driveby.with-little-help ). A recent study from Societe Generale shows that the emerging markets bolster the profits of global operating companies in general.

3. The emerging markets are still growing strong. The rising spending in China and other high growth countries - like India, Russia, Brazil and Turkey - stays the engine of the global economy and should counteract the weakness in the U.S. and Europe.

4. The price of oil fell to around $80, after climbing to $114 in spring (minus 30%). Other commodities got also cheaper. That is a big relief for consumers who have now more money in their wallets and can spend more bucks in the shops. Cheaper oil and other commodities should therefore bolster the retail sales in fall.

The reaction of the commodity markets is the big difference to 2008. Then the price for oil exploded to $147, other commodities also got more expensive, even though the recession had already started then. The high expenses for gas, heating oil & food forced many consumers to cut spending for other goods, even for their mortgages. Now falling commodity prices in combination with a healing job market are helping the economy.